Secrets to Boosting Social Security Benefits. Bob Carlson

Transcription

1 Secrets to Boosting Social Security Benefits Bob Carlson

2 Irreversible Decisions, Long-Term Effects Suddenly, Social Security benefits moved to the forefront of retirement planning for many Americans. For decades most people and even financial advisors paid little attention to Social Security retirement benefits. Many advisors simply sent clients to the Social Security Administration to learn about their benefits and options. Or they applied rules of thumb to everyone. Social Security benefits generally were considered an inconsequential part of retirement income, and many people believed there was little they could do to alter the amount of benefits received. Maybe the bearish turn of the stock market in 2000 followed by the financial crisis of 2008 caused the change. Or maybe it was the first Baby Boomers turning age 65 in 2011 that led to the change. Probably it was a combination of these and other factors. In any case, the views of many pre-retirees and financial professionals changed. Many started to realize that there are a lot of details about Social Security benefits that are worth knowing, because learning the details can lead to decisions that will improve retirement cash flow. Retirees and advisors realized, as I ve been saying for years, there is some flexibility in the rules for Social Security benefits. A retiree can substantially increase lifetime benefits by making the right decisions about Social Security benefits. Married couples can dramatically increase benefits by carefully coordinating their choices. It is critical for a near-retiree to spend time carefully analyzing the Social Security benefit options. The best choices often are not intuitive. Also, the income-maximizing options changed over time. Last decade s rules of thumb are not ideal for today's retirees.

3 Taking Social Security benefits doesn t always involve one decision. Sometimes a series of decisions should be made. Most decisions about Social Security benefits are irreversible and have long-term effects on the retiree's income. Yet, contrary to what many people believe, sometimes Social Security benefits can be changed. The traditional rule is that once selected, benefits are fixed. But there are at least two instances when a Social Security beneficiary can change her mind and re-start benefits. Few people are aware of these options. Just a few of the decisions are: At what age should benefits begin? When should a spouse begin benefits? Should benefits be based on your earnings record or your spouse's record? Do you want to maximize income now or in the future? Are survivor s benefits important to your decision? Maximizing Social Security benefits can greatly enhance retirement financial security. The benefits are an important part of many retirement plans today, and Social Security becomes more important in the later years of retirement. The decisions made early in retirement will greatly affect the retirement standard of living for many people. It no longer is appropriate to treat Social Security benefits as an afterthought and "bonus income." Social Security benefits are one of the foundations of retirement income. The lower one's working years' income, the more important Social Security benefits become to retirement cash flow. At lower incomes, Social Security can replace around 90% of working years' annual income. As income is higher, the Social Security replacement ratio declines. Yet, even at the highest incomes, an increase in Social Security benefits can enhance the retirement years.

4 Social Security is for many people the only part of retirement income that is both guaranteed and inflation-protected. These are two benefits that many people appreciate only after a few years of retirement. In this report we discuss how to get the most from Social Security. Like most government programs, Social Security can be complex. I simplify this complex subject without leaving out important information and carefully lead the reader through the key decisions to be made and the available options. Most importantly, I do not advise the reader to rely on outdated rules of thumb. I also show how the decisions should be different for different people. Pre-retirees and even retirees need a working knowledge of Social Security benefits. The program requires them to make important decisions. You do not want to leave money on the table, especially thousands of dollars of lifetime income for you and your spouse. With the guidance of this report, you won't.

5 The Future of Social Security It is no secret that the Social Security system is not in great financial shape. Each year the trustees of the Social Security Trust Fund issue a report describing the system's financial condition. For many years the report has been negative. The total expenditures of the program exceeded its non-interest income beginning in 2010, and that is expected to continue indefinitely. Beginning in 2018 the annual deficit is expected to increase steadily as the number of retirees grows faster than the number of workers paying taxes into the fund. The trust fund consists of special bonds issued by the Department of Treasury for the Social Security taxes it borrowed in the past. The solvency of Social Security depends on Treasury being able to make good on those bonds when the system needs the cash. Those redemptions are likely to begin in The details of the annual cash flows and when Social Security might run out of money change from year to year, depending on economic growth, inflation, and other factors. But the general conclusions are the same. The key conclusion is that once the reserves are exhausted, Social Security tax revenues will finance 70% to 75% of scheduled benefits almost indefinitely. That means without action by Congress, the program won t be able to pay 25% to 30% of promised benefits. For many years, Baby Boomers and those younger generally assumed they would receive no Social Security benefits, because the system would be bankrupt. The facts above, however, should lead the reader to a different conclusion. Social Security will continue to pay benefits for many decades. But the payments likely will be on different terms than in the past. There s a gap of 25% to 30% of

6 promised benefits, and the gap must be covered through lower benefits, higher taxes, or both. We have seen a sample of the likely changes in Medicare. It used to be that every Medicare beneficiary paid the same monthly premiums. That changed in The premiums now are "means-tested." Those with greater incomes pay higher premiums. Social Security already is partly means-tested, because higher-income beneficiaries have part of their benefits subject to income taxes. We can expect more means-testing. It is a mistake to assume at some point there will be no benefits from Social Security, especially for middle- and lower-income people. If you assume no Social Security benefits, then you ll have to save more money for retirement and likely will save far more money than you need to. That will reduce your pre-retirement standard of living. Upper-middle-income people and those better off, however, should realize that changes are likely to be made in the program, so you need to have some flexibility in your planning to allow for more means-testing of benefits or higher taxes or both. Consider some or all of the following changes likely in coming years: In the year any changes are made, it is likely that few people who are receiving Social Security benefits or are age 55 or older at that time will face reductions in benefits or increases in taxes. There might be exceptions for those with higher incomes. Of course, the longer Congress waits to act, the fewer people will be protected from the changes. Already the lower your working years income, the greater the percentage of that income you will receive in Social Security benefits. For example, someone who earned less than $20,000 annually is likely to receive 90% or more of that amount in Social Security benefits. This is called the replacement ratio. The replacement ratio

7 declines as income increases. For higher working-years incomes, the replacement ratio is likely to decline from its current levels when Congress decides to act. Through a complicated formula, the initial benefit payment is determined by taking a worker's lifetime annual earnings and inflating them based on average U.S. wage growth during his or her career. Historically, the Consumer Price Index rises at a much lower rate than wages. Some people say that artificially inflates Social Security benefits. They propose adjusting career wages for the CPI instead of wage growth. This would effectively reduce benefits, but few people would notice. The change would affect only those not yet receiving benefits. Few people would know the benefits they would have received under the old formula instead of the new formula. Those who followed their projected benefits over the years would notice lower estimates. Also, those near retirement probably would be grandfathered and have their benefits calculated under the old rules. A criticism of this approach is that it hurts lower-income people the most, and they are the ones for whom Social Security is their sole or primary source of retirement income. Payroll taxes could rise. This would affect those who have not already retired. The most likely change would affect higher-income workers by raising or eliminating the annual cap on the compensation on which Social Security taxes are imposed. These possible changes should be incorporated into retirement plans. The best way to incorporate the potential changes is to have a cushion or some flexibility in your plans. Your plan should be able to adapt to lower Social Security benefits or higher taxes. That means saving more money than would be needed under the current rules or having a retirement spending plan that can be adjusted for lower Social Security benefits. An

8 alternative is to take more risk with the investment portfolio to try to earn higher returns, offsetting higher taxes or lower benefits. How to Value Social Security Benefits Most people fail to realize that Social Security retirement benefits are an asset. It is a promised stream of inflation-adjusted income. It is an asset similar to an insurance or pension annuity. The right can be reduced or eliminated by Congress, just as an annuity might be lost in bankruptcy. But it does have value. Most people don't consider Social Security and other pensions and annuities when planning their investment portfolios. Even most financial planners and other investment professionals do not include Social Security and other pensions when determining a portfolio's allocation. Social Security makes its way into income projections, but often it does not figure into asset allocation. Because Social Security is not incorporated into the retirement portfolio, many people have more conservative portfolios than they realize. A pension such as Social Security has many of the characteristics of a highquality bond. You receive regular payments from it, and the payments usually are considered safe or reliable. A major difference between these annuities and a bond is that a pension or Social Security cannot be sold on the market. You should try to put a value on Social Security benefits and count this as part of your bond or fixed income allocation when determining how to invest your portfolio. Since Social Security and other pensions have characteristics of bonds, ignoring the pensions means your investment portfolio probably is overweighted to bonds and might be more conservative than you need it to be. In addition, many people save too much or

9 worry too much about retirement income because Social Security wasn't valued and considered. Younger people believe that they cannot count on Social Security and prefer to ignore it in their planning. That is not a reasonable approach for anyone age 50 or older, and even younger people should count on receiving some level of Social Security benefits. You might not want to take assume the current level of payments will be maintained, for the reasons stated in the previous section. But you should consider some level of benefits to be likely. Otherwise, you ll be saving more money than you need to. Valuing a fixed-payment pension (such as most corporate pensions or insurance annuities) is fairly simple. You need an estimated life expectancy and a discount rate (interest rate). For life expectancy, you can start with the IRS tables for a single life used for required minimum distributions and included in Publication 590. Or you can use the Period Life Table on the Social Security web site or as part of the Trustees Annual Report. Various other web sites also have life expectancy tables. Ideally, the interest rate is the current yield on a treasury bond with the maturity date closest to the life expectancy. You might want to use a higher interest rate such as for investment-grade corporate bonds. After obtaining these numbers, simply look up the "annuity factor" in a table such as the one nearby. For example, suppose a 70 year old is receiving a Social Security benefit of about $900 monthly. He decides to use a life expectancy of 14 years. Let's say the current treasury yield on a comparable debt is about 3%. Consulting the annuity factor table, you should interpolate the difference between 13 and 15 years, or and You can

10 use to make things easier. Multiply by the annual income of $10,800. The result is a current value of $121,932 for the benefits. Annuity Factor Table Interest Rate Years 2% 3% 4% 5% 6% 7% What if you aren't receiving the benefits yet? Then, another step with some higher math is involved. First, use the method above to determine the value the benefits will be at the age you'll begin receiving them, using your life expectancy at that age. Then, divide that benefit value by one plus the interest rate raised to the number of years between now and when the benefits will begin. Suppose your benefits will be valued at $135,000 at age 65, but you are age 60, and the appropriate interest rate is 5%. The present value of your benefits is

11 $135,000/(1.05) raised to the fifth power. To raise 1.05 to the fifth power, multiply 1.05 by itself five times. The resulting value for the benefits is $105, That means at age 60, your future Social Security benefits are worth $105, That is a simple way of estimating the valuing of your benefits. There are other ways you can determine the value of your benefits. The method you choose depends on how comfortable you are with math, the computing power available to you, and how theoretically accurate you want the estimate to be. Social Security benefits really are worth more than under this method for a couple of reasons. Social Security benefits are not fixed-payment benefits. The level of benefits rises each year with inflation. That makes them more valuable than a fixed payment annuity. In addition, if you are married some level of payments will continue to your surviving spouse after you pass away. Again, that makes the benefits more valuable than in the simple calculation. This second factor is easy to adjust for by using a joint life expectancy instead of a single life expectancy in the initial calculations. The inflation-indexing of benefits can be adjusted a couple of ways. One way is to use a financial calculator that is programmed to determine the present value of an annuity with rising payments. Select an inflation rate of 2% to 3% to determine value. Another option is to use the first method presented, but instead of the regular treasury bond yield use the yield on the appropriate TIPS (Treasury Inflation Protected Securities) bonds. This yield factors in the market place's expectations for inflation and will be less than the regular treasury yield. The result will be a higher value on the benefits.

12 Some people, after valuing their Social Security retirement benefits, reduce the value because of the financial uncertainty of Social Security. How much the value should be reduced is a guess, but some analysts believe a reduction in value is appropriate. As I said, more sophisticated and potentially more accurate methods are available for those who want to delve into higher math. The methods given here, however, are significantly better than not assigning any value to the benefits and will get you off to a good start. What is the point of valuing Social Security benefits and other pensions? It might cause you to reconsider your investments. When the benefit values are coupled with existing bonds, an investment portfolio might be more heavily weighted to bonds than previously thought. This is particularly true for those who retire with significant defined benefit pensions, such as government and military retirees. An investor might realize that he or she is able to take more risk in the portfolio because of the existence of Social Security and other benefits. The benefits should be re-valued periodically to reflect new life expectancies and interest rates. Otherwise, the investment portfolio will be out of balance over time. Which Age to Take Benefits The Basic Choices Each person who is eligible to receive them can choose to begin receiving Social Security retirement benefits at age 62 or any time after. The age at which benefits begin determines the level of benefits. The earlier the benefits start, the lower the initial payment is. I m going to explain how you can decide when you should begin receiving Social Security benefits. We ll start by explaining how single taxpayers can make the decision, and them move on to the more complicated situation of married couples.

13 A key concept of Social Security is Full Retirement Age (FRA). If you choose to begin benefits at this age, you receive the full or normal benefits under the program's formulas, also known as the Full Retirement Benefit (FRB). Begin benefits earlier, and your monthly checks will be reduced. Begin benefits after FRA and your benefits will be increased for each month you wait until you reach age 70. The FRA at the inception of Social Security was 65, but in reforms in 1983 it changed for anyone who was born after 1937, which means for anyone who turns 65 after The FRA rises roughly two months for each year you were born after 1937, with a break from , until the FRA becomes 67 for those born in 1960 or later. The schedule can be found on the Social Security web site or in my book, The New Rules of Retirement, Second Edition. The 1980s reforms also made adjustments to the formulas for computing benefits that begin before or after FRA. There is a bigger reduction for taking benefits before FRA than under the previous law, and the bonus for delaying benefits after FRA increased. This report won't devote much space to how Social Security benefits are calculated or determined, except when the information is useful to determining your benefits strategy. Details of how benefits are determined are readily available on the Social Security web site at and in The New Rules of Retirement. The easiest way to decide when to begin benefits is to compute the break-even point. Start with your estimated benefits. For a while, a statement of estimated benefits was mailed to everyone over age 25 a few months before his or her birthday each year. Then, the mailings were suspended to save money. The Social Security Administration (SSA) changed policies a few times, mailing them to select categories of people at

14 different times, and it probably will change policies again. Whatever the policy for mailing benefits, you can obtain an estimate of your benefits and a record of your earnings history any time by establishing a my Social Security account at by calling , or by visiting a local Social Security office. Suppose your normal benefit at FRA would be $1,400 per month. Waiting until age 70 would entitle you to $1,820 monthly or 130% of the normal benefit. Waiting until 70 gets you an extra $420 monthly. When your FRA is 66, taking benefits at your FRA means you receive payments 48 months earlier than waiting until 70. To find the break-even point, multiply the normal retirement benefit by the number of extra months you'll receive it than if you wait until 70 (or whatever age after FRA you select). Let s say your FRA is 66 and you want to compare that with waiting until age 70. In this example that is $1,400 times 48 for a total early payment of $67,200. Divide that by the increased monthly benefit for waiting until age 70 ($420). The result is 160. That is the number of months it will take for the total lifetime payments after age 70 to catch up with the lifetime payments you would receive from starting benefits at FRA. That comes to 13⅓ years. Around age 83 and four months the decision to delay benefits will begin to pay off. If you die before then, you and your family have lost money. Live at least that long, and you come out ahead. Another simple way to consider the break-even point is to calculate how much has been received in lifetime benefits at different ages. Using this method gives a similar result. In this example, at the end of the year you are 82, taking benefits early still generated about $2,000 more in lifetime benefits than delaying until age 70. By the end

15 of your 83 rd year, however, waiting until age 70 was about $3,000 ahead in lifetime benefits. The formula for determining the benefits paid at different ages was set up to closely follow the actuarial tables in existence in The increase for waiting is just under 8% per year for those born before 1943 and 8% per year for those born in 1943 and later. The system should come out whole on average, regardless of when people choose to begin benefits. Individuals will come out ahead or behind depending on when they choose to begin benefits and how long they live. Those who outlive the average life expectancy will come out ahead by delaying benefits, and those who die before life expectancy will lose money by waiting. Here's another example. Suppose you turn 62 this year. Your benefits payable at 62 would be 77.5% of normal retirement, meaning you'll receive $1,085 monthly at 62 if your FRA benefit were $1,400. Let s say FRA for you is 66. By taking benefits at 62, you will receive the benefits for an extra 48 months. That means total benefits received by FRA would be $67,200. Divide that amount by the $315 additional benefit you would receive by waiting until FRA. You'll find that it will take 231⅓ months, or years, for lifetime benefits from waiting to FRA to catch up with starting benefits at 62. That means you will have to live until almost age 80 to break even after waiting until normal retirement age to begin benefits. As in the other example, the break-even point is designed to be around normal life expectancy for the age group. (Remember, each year you live increases life expectancy. So, your life expectancy at age 66 is higher than at age 62.) Using the alternate breakeven

16 method yields a similar result, finding that delaying benefits until 66 begins to accumulate higher lifetime benefits between ages 78 and 79. Those are the basic rules, trade-offs, and ways to calculate simple break-even strategies related to the timing of your Social Security retirement benefits, but there are some more details that might help you. The monthly increase for delaying benefits isn t uniform from month to month. As William Meyer of the web site Social Security Solutions pointed out in an article in The Wall Street Journal, the monthly increase changes, and that can cause the break-even age to change a bit. From age 62 to 63, benefits increase 0.42 percent of the benefit per month of delay. From 63 through 66, they increase at 0.56 percent. From 66 through 70, benefits increase 0.67 percent for each month of delay. Because of this unevenness, there are optimum times and suboptimal times for singles to begin retirement benefits. Unfortunately, Social Security data indicate most people are making the wrong choices. Many people take benefits either when they re first eligible or at normal retirement age, and those are among the worst times. The worst times for singles to begin benefits, says Meyer, are between 62 years, one month and 63 years, 11 months and from 65 years, five months and 66 years, seven months. He says the break-even age is 78 years when benefits are begun from 62 to 63 but falls to 76 years at ages 63 to 64. The breakeven point from then is on a roller coaster through age 70. (Keep in mind that the optimal and suboptimal ages will change as the FRA changes.)

17 Because of this issue, you might want to compute the break-even point more precisely. That s easier to do now, thanks to some web sites that charge modest fees. I list them in the resource section at the end of this report. The simple break-even calculations also do not include other factors. Your benefits increase with inflation each year. That should push the break-even point of waiting a little further into the future. But there s a trick. As discussed earlier, when Social Security computes your benefits, it uses your wage history but also adjusts past wages for general wage inflation. Wage inflation usually is higher than Consumer Price Inflation, so you could benefit more by delaying benefits than is demonstrated by the simple break-even analysis. The wage history adjustment also should override the CPI indexing of receiving the benefits early and reduce the break-even point. Also, if you re considering postponing benefits, that probably means you don't need the money yet to pay expenses. You could begin benefits at an earlier age and invest the money (or let more of your investment accounts compound undisturbed). Investment returns could increase the advantage of early benefits, and that would push the breakeven point of waiting farther into the future. This is the effect of the time value of money. Receiving money now is more valuable than receiving the same amount later. But keep in mind that the investment returns aren t guaranteed. While your Social Security benefits are guaranteed to increase by 8% (tax free) each year, the money you invest could earn a lower return or even lose money. The simple break-even method doesn t take into the difference in investment returns as well as potential changes in inflation and taxes. When you move beyond the simple break-even method, the calculations become potentially more accurate but also far

18 more complicated. They re also speculative, because they depend on assumptions about the future. Fortunately, New York Life Insurance Company published a paper in 2015 that did the calculations. The paper concluded that net effect of incorporating the additional factors made delaying benefits even more attractive in most cases. So, there s probably no need to venture beyond the simple breakeven analysis. Historically, most Americans begin receiving their Social Security benefits earlier rather than later, and many begin benefits as soon as they can. The percentage of recipients delaying benefits increased in recent years, which probably is the result of more financial advisers and writers learning about Social Security and showing people how to maximize benefits. Even so, a high percentage still take benefits early. About 37.5 percent of men and 42.4 percent of women claimed their retirement benefits at age 62, according to the 2013 Social Security Administration s Annual Statistical Supplement. Yet, 10 years earlier about 50 percent claimed benefits at 62. About 31.5 percent of men and 25.2 percent of women now wait until their FRA to claim benefits. Far fewer than 10 percent wait until age 70, when benefits are maximized, and that number s held steady for decades. Don t Leave Money on the Table As I ve said, the key to remember about the way retirement benefits vary as you age is that anyone who lives to life expectancy receives the same lifetime payouts regardless of the age benefits begin. That makes the normal life expectancy the "break-even point." Live beyond that point and you will benefit by waiting to receive benefits. Your lifetime benefits will exceed what you would receive by

19 starting at age 62. So, if you are the roughly half of people born in the same year who live beyond average life expectancy, delaying benefits will pay off. Of course, no one can be certain about living longer or shorter than average life expectancy. You have to decide which risk to take. One risk is that you delay benefits but don t live to average life expectancy. Then, you and your heirs are shortchanged. The other risk is that you live beyond life expectancy. Then, as your other assets are spent and your cost of living rises with inflation, you realize your Social Security retirement benefits would be higher if you d waited a few years before applying for them. There s another important fact that makes delaying benefits attractive for more people. The formulas were set in 1983, the last time Social Security was reformed, using life expectancy tables available at the time. Life expectancies have increased considerably since then. For example, about half of men currently age 65 will live past age 85, which was not the case in Since life expectancy now is longer than reflected in the tables used by Social Security, more than half of people who begin benefits now are likely to life beyond the average life expectancy. That means more than half of new Social Security beneficiaries will come out ahead by delaying benefits. Another factor is that the annual wage history adjustments also increase the initial benefit for those who delay benefits. If you wait until age 70 to begin benefits, you should receive a higher benefit than the one estimated when you were age 62, because your wage history is adjusted for the wage inflation all those years.

20 There also can be tax benefits to delaying Social Security and using retirement accounts early to pay for expenses. Required minimum distributions (RMDs) from qualified retirement accounts such as IRAs begin after 70½, and the percentage of the account that must be distributed increases each year as you age. By the late 70s, RMDs often are more than people need to pay their expenses. The excess RMDs increase annual income taxes, reduce the tax-deferred compounding of income and gains in the account, and can diminish the amounts available for heirs to inherit. If your RMDs will reach a point that they will exceed what you need to pay expenses, one way to deal with that is to delay Social Security retirement benefits and drawn down qualified accounts early, allowing taxable accounts and Social Security benefits to increase. Another reason to delay benefits to at least full retirement age is that you might return to work between 62 and FRA. Returning to work causes the benefits to be reduced when the earned income exceeds the amount allowed under the law. (We discuss the details later in this report.) But at Full Retirement Age and after, Social Security benefits are not reduced regardless of the amount of earned income. Working also could trigger income taxes on the benefits that are received. Despite the advantage of delaying Social Security benefits, it is not for everyone. Some people simply need the income before the benefits can be maximized. They left their employment and are unable or unwilling to seek other work. They

21 also do not have enough savings to delay benefits or are uncomfortable drawing down their nest eggs to that extent so early. Another reason not to delay benefits is that health or other reasons raise doubt a person will reach normal life expectancy. If that is the case, the only reason to delay benefits is to increase benefits for a surviving spouse, which we discuss immediately below. Introducing Spousal Benefits So far, we have analyzed when a single person should begin Social Security benefits. Yet, Social Security retirement benefits also come with benefits for a spouse. There is a spousal benefit that is available when the primary beneficiary is alive. There also is a survivor s benefit available after the primary beneficiary passes away. These benefits can be substantial, especially when the spouse doesn t have substantial earned benefits based on his or her own earnings history. The age the primary beneficiary begins retirement benefits affects the benefits available as spousal and survivor s benefits. Also, when married couples consider their benefits in tandem, coordinating the benefits can increase the family s total lifetime benefits compared to what would be received if each spouse independently considered when to begin benefits. Substantial changes were made in the strategies for spouses in the Bipartisan Budget Act of The law basically eliminated the ability to use several profitable strategies for married couples, and that makes it more important for spouses to carefully coordinate their choices. The important rule is that a married person qualifies for Social Security benefits based on either his or her own earnings or the spouse s.

22 A person who earned wages (or self-employment income) for at least 40 quarters (10 years) qualifies for his or her own Social Security benefits. A married person also is eligible for a retirement benefit that is 50 percent of his or her living spouse s benefit at FRA. When a married person is eligible for benefits under both his or her own earnings history and the other spouse s earnings history, the person is paid the higher of the two benefits. Both benefits aren t paid, only the higher of the two. Keep in mind, however, that a spousal benefit can t be received until the other spouse actually files to begin receiving benefits. If the higher-earning spouse hasn t filed to receive benefits, the lowerearning spouse can t begin receiving a spousal benefit yet. A surviving spouse is entitled to receive 100 percent of his or her deceased spouse s retirement benefit that was being received at death, if it is higher than the survivor s own benefit. Again the survivor will receive only one benefit. That means when a married couple was receiving two Social Security retirement benefits and one of the spouses passes away, the survivor will receive only the higher of the two benefits. The other benefit is terminated. Let s look at an example. Suppose Max and Rosie Profits each work until eligible for full retirement benefits. Max is entitled to a monthly benefit of $1,000 based on his earnings history, and Rosie is eligible for $300 based on her earnings history. Because Rosie s earned benefit is less than 50 percent of Max s earned benefit, she ll receive the $500 spousal benefit based on Max s benefit. Together, they ll receive $1,500 in monthly benefits if they apply for benefits today at FRA. Suppose Max dies before Rosie. Then, Rosie can change her benefit to the $1,000 per month she is entitled to as Max s widow 100 percent of Max s retirement benefit.

23 She receives only the $1,000 and stops receiving the $500 spousal benefit she was receiving. So, her household income will decline to $1,000. If Rosie dies first, Max continues to receive his $1,000 benefit, because it is higher than 100 percent of Rosie s earned benefit that would be his survivor s benefit. (This example ignores the inflation adjustments that occur while they are receiving benefits.) Because your spouse s retirement and survivor benefits depend on your benefit, they are something to keep in mind when choosing the starting date for your Social Security benefits. For example, let s assume a married couple in which the husband earned more than his wife. The husband might decide, considering only his situation, that it makes sense for him to begin benefits at age 62. The decision might change, however, if he considers the effect on his wife. As a woman, she is statistically likely to live longer than her husband. If she survives her husband, her survivor s benefit is going to be based on the husband s benefit, unless her earned benefit is higher. Also, during her life she ll receive the higher of her own benefit and 50 percent of her husband s benefit at FRA. For the husband in some situations, delaying Social Security retirement benefits can be a cheap form of life insurance that maximizes his wife s income after he s gone. More on Spouses and Benefits Now, we will look in more detail at how spouses earnings and decisions can affect each other s benefits and how they can coordinate the timing of their benefits to maximize household income. There are options for each spouse that could greatly influence the lifetime Social Security earnings of both spouses and of the family. You ll

24 learn that it is beneficial for spouses to coordinate when each begins benefits instead of separately considering their decisions. Note an important difference between the benefits of a spouse and a surviving spouse. While the higher-earning spouse is alive, the lower-earning spouse s retirement benefit is half of the higher-earning spouse s FRA benefit, regardless of the age he begins benefits. But after the higher-earning spouse passes away, the lower-earning spouse s survivor benefit is the retirement benefit the higher-earning spouse actually was receiving, if he or she was already receiving benefits. (The survivor s benefit is the FRA benefit if the deceased spouse wasn t already receiving benefits.) The amount of that benefit will depend on the age when the higher-earning spouse chose to begin benefits. If the higher-earning spouse began receiving benefits before FRA, the surviving spouse will receive less than the full retirement benefit as a survivor benefit. There is an additional step in the computation of a spouse s benefit. The benefit received is based on a combination of the other spouse s benefit at FRA and the age at which the lower-earning spouse actually begins receiving benefits. There s a reduction in benefits for starting before FRA whether a person s benefit is based on his or her earnings record or the spouse s. If a spousal benefit is begun before the recipient s own FRA, the benefit will be reduced on the same sliding scale as earned benefits. If age 62 is selected to begin a spousal benefit, the benefit received will be about 35 percent less than what he or she would receive at FRA. Summarizing Spousal Strategies We will build on the rules already discussed to develop strategies that might further boost the guaranteed retirement income of you and your spouse.

25 For a spouse to receive a spousal retirement benefit, the other spouse first must be receiving retirement benefits. Let s assume the wife is the lower-earning spouse, and the husband is the higher-earning spouse. If the wife is ready to retire and wants to receive benefits before her husband is ready to, the wife s benefits will not be based on the husband s earned benefits; she can receive only her earned benefits. The wife can begin receiving benefits based on her own earnings record when the husband is not yet receiving benefits. After the husband begins receiving benefits, the wife can change to receive spousal benefits based on the husband s earnings record. If the wife began receiving benefits before her FRA, the benefits received both times will be reduced by the formula that s used to reduce all benefits received before FRA. Let s look at some examples. Rosie Profits has reached her FRA and wants to begin receiving benefits. Her husband, Max, hasn t reached his FRA and wants to delay benefits at least until his FRA. Rosie is entitled to $500 monthly at FRA based on her own earnings. When Max reaches FRA, he will be entitled to $1,800 monthly, and he plans to begin benefits then. Rosie can begin receiving $500 now. When Max begins benefits at his FRA, Rosie will receive an additional $400 to bring her total to $900 monthly half of Max s benefits. (The example also doesn t consider inflation adjustments.) Suppose the same facts except Rosie begins receiving her benefits before her FRA. She will receive a reduced benefit based on her earnings history and the age she begins benefits. Let s say her reduced benefit is $400 monthly. When Max retires at FRA, Rosie still will be able to switch to a spousal benefit and receive the additional $400. That will bring her monthly benefit to only $800. By beginning benefits before

26 FRA, she permanently reduced her monthly benefit, even after Max retires at FRA and she begins the spousal benefit. Now suppose Max begins benefits before reaching his FRA, and Rosie already began receiving $400 monthly before her FRA. Rosie can begin receiving the spousal benefit when Max begins receiving his benefits, but Rosie s benefit will be reduced again. It s reduced once because Rosie began receiving benefits before her FRA, and it s reduced again because Max is taking his benefits before his FRA and is receiving less than his full benefit. She should receive less than the $800 monthly in the previous example. The exact reduction will depend on when each of them begins receiving benefits. As you can see, the rules and scenarios can get complicated. Social Security s website calculators can help explore results under different scenarios. There are other tools available to help make the decision, and they are listed at the end of this report. Also, later in this report I discuss some general strategies that can help married couples review their options. Advanced Strategies for Spouses Curtailed by 2015 Law Until the Bipartisan Budget Act of 2015, Social Security benefit rules allowed some interesting planning strategies for married couples. Congress snuck a major change to Social Security benefit claiming strategies into the law. The change will cost retirees who could have planned carefully tens of thousands of dollars over their lifetimes. The law eliminated or curtailed two claiming strategies that were becoming popular. Apparently, some people in the administration and Congress had been opposed

27 to these strategies and aimed to eliminate them. Instead of the usual process of proposing laws and having them discussed in committees, the provisions were inserted into the budget deal negotiated between the president and congressional leaders. The strategies were created in a 2000 law, and opponents of the strategies believe they were unintended loopholes or effects of the 2000 changes. The two strategies are known generally as restricted application (or claim now, claim more later), and file and suspend. Here s a summary of the strategies: Restricted filing. A married person generally receives retirement benefits of the higher of his or her own earned benefit and 50 percent of the amount his or her spouse would receive at FRA. But a special rule allowed anyone at normal retirement age or older to file an initial claim for spousal benefits only. This allowed the person to receive some Social Security benefits while either continuing to work or simply allowing his or her own Social Security benefits to increase 8 percent annually up to age 70. A person was allowed at any time after FRA to switch from spousal benefits to earned benefits. One spouse had to have already filed for earned retirement benefits in order for the other to file a restricted application for spousal benefits only. File and suspend. Spousal benefits can be received only if the other spouse has filed to claim retirement benefits. The file and suspend strategy allowed the lowerearning spouse to receive the spousal benefit while the higher-earning spouse continued to defer receiving benefits and accrued the 8 percent annual increase from delaying benefits. The higher-earning spouse would file for retirement benefits at FRA or later and then immediately suspend the benefits. Filing for benefits allowed the other spouse to file for the higher of his or her earned benefits and the 50 percent spousal benefit. Suspending

28 the filing didn t affect that. But the suspension reinstated the monthly increase from deferring benefits until the higher-income spouse decided to begin benefit payments. The strategies are largely eliminated in the 2015 law, but it phased in the changes, so some people still had the opportunity to take advantage. Here are the changes: Restricted filing. The ability to file a restricted application for spousal benefits at FRA or later is eliminated for those who turn 62 after 2015 (those born in 1954 or later). Everyone in that age group will be treated as applying for the higher of his or her earned benefits and the spousal benefit whenever applying for benefits. File and suspend. This strategy was allowed for six months following enactment of the law. So, if the higher earning spouse was age 66 or older within the six-month period, the strategy still was available to the couple. The Social Security Administration set the filing deadline as April 29, After the six-month grace period, someone who has filed for retirement benefits still can suspend them anytime after reaching FRA. The catch is that benefits also stop to almost anyone else who is receiving benefits based on that person s earnings. That includes spouses and minors and disabled children receiving benefits based on the person s earning history. It apparently does not include divorced spouses. So, a higher-earning spouse isn t able to file and suspend in order to allow the lower-earning spouse to receive the higher spousal benefit. Keep in mind that while a spouse is entitled to the higher of his or her earned benefits and 50 percent of the other spouse s FRA benefit, the spousal benefit is payable only after the higher-earning spouse has filed to receive benefits. Now, the higher-earning spouse has to make a choice: file to

29 receive benefits earlier than planned in order for the other spouse to receive the higher spousal benefit, or wait to begin benefits so that the benefit payment will be higher. A reason the file and suspend strategy made sense was the survivor s benefit. When one spouse dies, the surviving spouse receives the higher of his or her earned benefit and what the other spouse was receiving at the time of death (or was entitled to at FRA if benefits hadn t begun). It made sense for the higher-earning spouse to wait until age 70 to receive benefits if possible, because it ensured that the surviving spouse of the two would receive the highest possible benefit for life. As I ve said, having the higherearning spouse delay benefits is a cheap form of life insurance. The survivor s benefit rule still is in place, and it still makes sense in many cases for the higher-earning spouse to delay benefits until age 70 to ensure the maximum lifetime benefit for each spouse. The lower-earning spouse will have to be content with his or her earned benefits during that time instead of a higher spousal benefit. Another strategy that isn t affected is that benefits still can be suspended for those who have other reasons to suspend benefits after FRA. Suppose Max Profits is younger than 70 and files to begin receiving retirement benefits. Perhaps he was laid off or intended to retire. After some time, Max is back in the workplace and earning enough that he doesn t need the Social Security benefits. He decides it makes more sense to suspend the benefits so that they can earn some delayed retirement credits. When Max eventually resumes the benefits, they will be higher than when they were suspended because of the delayed retirement credits. In that case, he can suspend benefits any time after reaching FRA. But he can t suspend benefits until he is at least FRA. So, if he begins benefits as soon as possible at age 62, they can t be suspended until FRA.

30 The law didn t affect the benefits of divorced spouses. They still can qualify to claim benefits on an ex-spouse s earnings record without regard to whether the other spouse has filed to receive benefits or suspended benefits. (Benefits for divorced spouses are discussed later in this report.) Here s another strategy that s affected. Suppose Max either didn t start benefits at FRA or he began benefits and then suspended them. He decides he not only needs to begin (or resume) the benefits but he also needs additional cash. Previously, he effectively could have benefits resumed retroactively, receiving a lump sum for up to six months of past benefits in addition to having his benefit checks resume. Under the new law, the lump sum for benefits that had been foregone is no longer available. Finding the Optimal Spousal Strategy Married couples need to take the time to analyze their Social Security strategies. Though married couples don t have as many options as they did before the 2015 law, there still are options and decisions to be made about when to receive benefits and how to coordinate them between spouses. Here are some examples of how couples might decide to coordinate their benefits. Consider the case of a married couple in which each spouse has a work history that qualifies for Social Security benefits. Let s say the lower earning spouse s benefits are more than half of those of the higher earner s benefits. That means each spouse is going to receive benefits based on his or her work history. In this case, it likely is going to make sense for the higher earning spouse to delay receiving benefits until age 70. That ensures he or she receives the maximum possible benefit, and that whichever is the surviving spouse will continue to receive the highest